GE Accelerates Asset Disposal

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General Electric(GE) and Baker Hughes (BHGE) mutually agreed to a release from the lockup that had prevented GE from disposing of shares of BHGE until July 2019. As part of the agreement, BHGE and GE will cooperate on a proposed sale by GE of part of its stake into the market (perhaps through an initial public offering) and to a concurrent repurchase of another part of GE’s stake by BHGE. GE’s remaining stake, which the firm expects to stay above 50%, will be subject to a 180-day lockup prohibiting further sales into the market. Based on our calculations, GE will at most reduce its 62.5% interest in BHGE by 12.4%.

We think this a necessary move by new GE CEO Larry Culp. We see it as a better deal for BHGE, given that GE is forced to negotiate from weakness and BHGE’s stock is undervalued (our fair value estimate for BHGE is $32 against the Nov. 12 closing price of $23.64). We believe this may be a better deal for a potential buyer of GE’s BHGE stake in the public markets. That said, given GE’s high debt burden and year-to-date industrial free cash flow of negative $335 million, we think Culp is wise to unwind assets. We continue to believe the fair market value of GE’s assets net of liabilities represents significant upside to the current stock price around $8. Given the relatively small impact on GE’s value, we don’t expect a large change in our fair value estimate; we anticipate the changes will amount to dimes on our current $16.30 fair value estimate.

Joshua Aguilar does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.